Climate Money Trap: So Many Adaptation Finance Innovations, But What Do They Add Up To?
Update for an INC project - Feedback welcome!
For the past few months. John and I have been working with partners at Meister Consultants Group and Ramboll to understand the challenges and opportunities facing cities trying to fund their climate adaptation plans. It's no secret that finding money is proving to be a big barrier to advancing urban adaptation, as we discussed in Essential Capacities for Urban Climate Adaptation. So it's no surprise that lots of people--cities, NGOs, government policy makers, financial institutions, insurance companies, and others--are trying to do something about it. We've identified more than 30 innovations or revisions of current financial practice that are in the works, almost all of them at experimental scale. Now we're thinking about what these add up to, how they contribute to the development of a system for urban climate finance. Below we provide a summary list of these various projects, divided into 6 categories based on what the goal is, and then some initial thoughts about what it looks like to shape these blooming flowers into a well tended garden. The categories:
A. Generating Public Revenues
B. Managing Financial Risk
C. Balancing Burdens and Benefits
D. Aligning Public Policies
E. Leveraging/Catalyzing Private Capital
F. Revising Government Jurisdictions
| A1 | Improve cost-benefit analysis (CBA) to make the case for public return on resilience-project and plan investments, including valuation of environmental services. In addition, CBA could be modified to include other value for a city: GHG emissions reduction, improved social and economic equity, safety, and others. |
| A2 | Require that city infrastructure projects and capital budgets incorporate climate risk and vulnerability analysis and adaptation plans—a way to ensure that future spending that must occur anyway contributes to resilience. |
| A3 | Use targeted federal Disaster Recovery funds (already in state government hands) for pre-disaster planning in eligible communities. |
| A4 | Develop ways to monetize some of the long-term value that resilience creates: environmental and social benefits, future loss avoidance (insurance); and future cost avoidance (public and mental health). |
| A5 | Use district-level financing mechanisms (property tax or user fee surcharges or incremental property tax value capture) to fund district-specific resilience projects. |
| A6 | Issue “resilience bonds” that generate risk-reduction rebates from a city’s catastrophe insurance premiums to pay for resilience projects. |
| A7 | Create local stormwater markets and credit trading. |
| A8 | Create new state government revenues (e.g., surcharges on property insurance premiums or carbon taxes) to fund risk-reduction interventions. |
| B1 | Develop metrics and disclosures that enable financial markets to incorporate risk more accurately into asset values and interest rates |
| B2 | Package bonds for city adaptation projects with climate-risk insurance to strengthen debt repayment likelihood. |
| B3 | Use “pay for performance” design in Environmental Impact Bonds, which make the amount of payments to lenders contingent on performance of the adaptation measures, such as green infrastructure. |
| B4 | Require the purchase of extreme weather insurance tied to mortgages. |
| B5 | Prepare accurate flood-risk maps for cities and making them available to the public |
| B6 | Prepare city resilience plans and flood-risk maps based on insurance loss data from the insurance sector, which enables insurers to show reinsurers the city had reduced risks by taking due to adaptation strategies and this resulted in favorable reinsurance contracts |
| B7 | Support bond-rating agencies to build the technical capacity to assess cities’ climate risks and adaptation plans. |
| C1 | Design city adaptation investment plans to combine citywide revenues, district-scale revenues, and incentives for private investment in ways that are fair and equitable |
| C2 | Use community-based organizations and financial institutions to develop and finance projects that advance economic and social equity in the city. |
| D1 | Replace National Flood Insurance Program with lower-cost state program. (Where participants in NFIP have paid more than benefits received, potential is to replace NFIP with a state-controlled model.) |
| D2 | Increase participation in FEMA Community Rating System in which municipalities earn credits (discounted NFIP premiums up to 45%) for different flood-reduction activities. All buildings receive same discount. Only 5% of 22,000 eligible NFIP communities participate; FEMA looking to expand and use structure-based pricing system. |
| D3 | Use FEMA to facilitate a market for cities or groups of cities to obtain pooled low-cost disaster insurance coverage. |
| D4 | Use risk-adjusted insurance premiums and longer-term property insurance policies, which typically run for only a year. |
| D5 | Require climate-risk disclosure for properties for sale. |
| E1 | Issue municipal “green bonds” to attract capital to bundles of resilience projects. |
| E2 | Establish public-private partnerships to bring private expertise and capital to the design, financing, construction, operation and/or maintenance of a publicly owned asset, with contracted payments based on project revenues. |
| E3 | Provide government credit enhancement for private investment—e.g., loan reserves and guarantees, first-loss position. |
| E4 | Use Green Bank loan programs to property owners to increase resilience. |
| E5 | Expand city “linkage payment” system for parcel-level development to obtain private funding for resilience projects. |
| E6 | Use density bonuses and other development incentives to induce investment in resilience strengthening. |
| F1 | Jointly plan and finance infrastructure investments across municipal and utility jurisdictions, including the creation of single entities, such as flood and resilience districts to conduct this integrated work. |
| F2 | Create special-purpose resilience and/or flood districts. |
| F3 | Develop coastal master plans that cover numerous communities. |
| F4 | Develop alternative business models for infrastructure sectors, including utilities, which need to finance substantial adaptation infrastructure. |
| F5 | Strengthen the capacity for district-scale planning, financing, and operations in a city, including the ability to align and coordinate with the city and negotiate with property owners and residents in the district. |
Accelerating and expanding the development of an urban climate-financing system could follow several approaches:
- Enhancing City-Level Transaction Capabilities. Cities need the ability to produce high-quality and equitable adaptation plans and projects with comprehensive, hybrid investment strategies backed by the necessary multi-jurisdictional governance arrangements and community support, and a technical capacity to implement transactions through a variety of financial mechanisms. Few cities have these capabilities in place for climate adaptation.
- Aligning Government Policies. Cities need state and federal governments to initiate comprehensive, aligned policies, regulations, and standards that support increases in public revenue and private capital for climate adaptation, and eliminate barriers for cities and distortions in market behaviors. Only a few states are moving in such a direction, as are some federal agencies such as FEMA, but the efforts are not usually aligned with each other or through engagement of cities and market players.
- Scaling Changes in Financial, Insurance, and Real Estate Markets. Cities need key markets to accurately price climate risk and develop and rapidly deploy risk management solutions for private capital, including revised and new products and services, and put in place standards for risk disclosure and resilience financing. “Making these market mechanisms work effectively requires a widely accepted set of standards and disclosures for buildings that signals the degree of resilience to the various actors and helps them assess risks more accurately,” as the Sustainable Solutions Lab of the University of Massachusetts-Boston reported in April 2018.[1]
